Ladbrokes PLC Annual Report & Accounts 2014
2014 was a year in which
the strength of the
Ladbrokes brand began to
be fully matched by a
competitive offer.

We entered the year believing that the first half would all be about operational delivery and the second half would be about growth.
Peter Erskine, Chairman
Peter Erskine
Chairman

Chairman's statement

OUTLINE

Our belief in the shape of the year was correct. We ended the year with all our operational targets met and with the evidence emerging that our structural improvements are driving improved customer metrics and financial performance. We enter 2015 confident but not complacent.

WORLD CUP CHALLENGE

The World Cup was the acid test for the business after four years of substantive rebuilding and the Ladbrokes team rose to the challenge. In what was a fiercely competitive market we competed hard and across all the key metrics we regarded as important, the business delivered. Overall staking was up 22.4% with the key area of Digital seeing net revenue up 25.9%. It was the mobile World Cup as customers chose their mobiles to be the portal of choice and our offer more than met their expectations. Mobile staking growth was up over 1,100% and accounted for 63% of all Sportsbook staking. Retail, while impacted by the switch to mobile, still delivered with staking up 7.9%.

While the tournament did not start with the bang we hoped, with results initially weak, we held our nerve, we backed our judgement on the teams to take on and the teams to avoid and we traded hard. This resulted in a gross win margin of 24.3% and an overall gross win of £28.0m for the tournament.

CORE BUSINESS ON TRACK

Aside from the World Cup the litmus test for our competitiveness has been the performance of our Digital business. We entered 2014 with a new management team and the Playtech partnership still being implemented as we exited previous contractual commitments.We recognised that the pace of progress caused frustration in the short-term but we remained confident that these were obstacles not barriers to our long-term opportunities and progress.

Our Sportsbook offer and the performance of Mobile are encouraging signs that where we have the product and platform in place the brand can deliver. The early signs are that Gaming is beginning to reap the benefits of the changes we have put in place. We enter 2015 with the foundations in place to allow the business to deliver the full potential of the Playtech deal.

The retail environment continues to remain challenging but our Retail offer continues to be an engine for the wider Ladbrokes business. However, we cannot afford to stand still as our market continues to evolve. We continued to invest in the offer to keep it relevant for the modern customer and in the year we introduced Self Service Betting Terminals (SSBTs), a wider and more attractive football offer and more modern gaming machines, all to meet growing customer expectation on service and experience.

We are not blind to the challenges retail faces in a rapidly changing consumer world. Customers have more choice on how they want to consume, more expectations on convenience and greater awareness of value. Yet like all retailers, we know that if we can be the customer's number one choice on the High Street and online, we will get a higher return on that customer. That is why we believe we have to keep investing in our Retail and Digital offer in unison and win the multichannel customer over to Ladbrokes.

A key part of the future of Ladbrokes is the need to build income streams outside of the UK. As we have seen over the year, the regulatory and political uncertainty of the UK can hinder a fair reflection of the value of the business.

That is why it is pleasing to report on the positive steps taken by our international business this year. In Spain and Belgium we have established an online presence to complement our retail offer. In Australia we entered the market with a small acquisition at the end of 2013 and have doubled its size through acquisition and organic growth. Opportunities overseas can take a long time to come to fruition and are often hard fought but we remain alive to the power of our brand to either translate to new countries or to be a credible force in establishing a new brand. Our positions in China and USA evidence this belief and while currently small, offer potential long-term opportunities.

SOCIAL RESPONSIBILITY

Responsible gambling has always been at the heart of the business, but the greater scrutiny we now have as an industry has led us to dig deeper into the organisation to ensure we can not only say it with complete confidence but evidence it.

We have established a Board Social Responsibility Committee chaired by Senior Independent Director, John Kelly, and issues such as our new Responsible Gambling Policy, our commitment to advertise the benefits of taking a responsible approach to gambling and the link between executive remuneration and responsible gambling targets have all been considered. The foundation of the Senet Group to drive greater responsible gambling messaging across the industry has been welcomed widely and we are proud to be a founder member.

However, some in the industry have been slow to react to this agenda and are blind to the threat posed by public discontent at their actions. We are not here to give moral lectures to industry partners but there remains a threat at all levels that the actions of the slowest will hurt us all. That is why I am proud that we continue to take a stance as an industry leader and live the measures throughout the business.

BOARD FOCUS

Following the travails of 2013 much of the Board focus has been on ensuring the key operational targets for 2014 outlined by the executive team have been delivered. We were confident in the ability of the business to deliver and that underwrote our commitment to at least maintaining the dividend for the year.

However, we have not just focused on the here and now, we realise that shareholder value is created over the longer term and we challenged the executive and senior team to look ahead. In the year we looked at the rise of the multi-channel customer and what that meant for both our Digital and Retail businesses and our reliance on the UK market. We examined the international opportunities and our ability to exploit them. We looked at our core strengths and the power of our trading and liability management teams and technology to drive new business opportunities and efficiencies.

Perhaps the biggest decision we faced this year was over the leadership of the business. Richard Glynn joined us as Chief Executive in 2010 with a clear remit to engineer a turnaround in the business and make us competitive once again. I think in hindsight, none of us realised just how big a task this was. Richard worked tirelessly in his quest to deliver a stronger Ladbrokes. The journey has not always been smooth and shareholder patience has been tested, but as a Board we strongly believe that we are fundamentally more resilient and competitive than we were and that the foundations have been laid to build a stronger more successful Ladbrokes.

That naturally led us to consider the composition of the team going forward and in discussing it with Richard, we came to the mutual conclusion that it was time to let someone new take over the reins. Richard leaves with the Board's gratitude and my personal thanks for the determination, commitment and passion he brought to the role. No one has fought harder for Ladbrokes than Richard in the last five years and I wish him all the success in the future.

LOOKING AHEAD

Building on the foundations laid over the last few years is the key task facing the new Ladbrokes management team. As part of that task, we have also looked at the right incentives to have in place. The Ladbrokes Growth Plan was specifically aimed at incentivising a turnaround and ends this summer. We have consulted on a replacement which looks at having the right incentives in place to meet modern best practice but also to act as a catalyst for management out performance. We believe we have achieved this and look forward to reporting on it successfully rewarding management for shareholder performance in the future.

As the Group implemented its operational turnaround, the Board committed to pay dividends of 8.9p per share for 2013 and 2014, outside our historic dividend policy which is based on earnings cover whilst remaining within our target leverage policy of net debt being in the range of 1.5/2.0 times EBITDA (before exceptional items).

The Board currently intends to continue to pay a dividend of 8.9p per share for the 2015 financial year.

We enter 2015 conscious that it will be another challenging year, earnings are forecast to be down reflecting regulatory and tax headwinds and we will have to run very hard just to stand still with circa £50m of extra tax to be borne. All this on top of the regulatory uncertainty the General Election will cause.

However, the progress made in the business in 2014 has been through a focus on the matters that are within our control and this will continue to be the mantra for the year ahead. The business is beginning to see the benefits of its strategy in key customer metrics which lead to financial performance. The trends are encouraging but we are not getting carried away.